DALLAS — The Houston Independent School District is refunding $186.5 million of variable-rate debt in one of the largest school bond issues in Texas this year.

The bonds are pricing this week through negotiation. Morgan Stanley and Citi are senior managers and re-marketing agents. Estrada Hinojosa & Co. and Loop Capital Markets are co-managers.

The HISD bonds carry underlying ratings of Aaa from Moody’s Investors Service and AA-plus from Standard & Poor’s but get top ratings and stable outlooks from both agencies because through the Permanent School Fund that guarantees most school bond issues in Texas. Fitch Ratings does not rate the debt.

The state’s largest school district has $2.3 billion of general obligation debt and $118.9 million of lease revenue bonds issued by the Houston Independent School District Public Facility Corp.

“In our opinion, the district’s above-average debt levels and significant capital needs are factors that limit the rating at the current level,” wrote Standard & Poor’s analyst Horacio Aldrete-Sanchez.

Proceeds from the Series 2012 bonds will refund all of the district’s Series 2004 variable-rate limited-tax schoolhouse bonds.

The Series 2012 variable-rate bonds are subject to mandatory tenders at the end of each of the three initial rate periods — $56.265 million on June 15, 2013, $63.560 million on June 15, 2014, and $66.630 million on June 15, 2015.

The bonds do not have a liquidity facility, according to analysts.

The district is not required to buy the bonds on the first mandatory tender dates, because a failed conversion or remarketing does not constitute default. Instead, a failed remarketing at the end of each of the initial rate periods will cause the district to pay interest on the bonds at a higher rate of 7.5%.

If the stepped-up rate goes into effect, the district can remarket or redeem the bonds. The 2012 bonds represent about 8% of the district’s GO debt.

“We believe that the potential liquidity risk associated with a failed remarketing on the Series 2012 bonds is mitigated by the relatively small amount of the tendered amounts compared to both the overall stock of debt of the district and its available reserve levels,” Aldrete-Sanchez wrote.

The district covers about two-thirds of Houston and enrolls more than 200,000 students, making it the nation’s seventh-largest district. Its fiscal 2012 assessed valuation grew 1.6% to $106.1 billion.

HISD’s proposed fiscal 2013 budget identifies a $53.2 million deficit, which officials propose to close with the use of one-time items, including $18 million in remaining federal stimulus funds, and $17 million in funds that would otherwise be used to prepay bonds.

“The outlook for Houston ISD is stable, given the large tax base along with flat to modest student enrollment growth and facilities able to meet demand,” said Moody’s analyst Kristin Button. “The outlook also reflects solid financial operations characterized by conservative budgeting, healthy reserves and favorable revenue-raising flexibility, which are expected to enable the district to weather budgetary challenges in the current biennium.”

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